following modifiable notes | The Communication Blog

Saturday, January 29, 2011

following modifiable notes

By Pansy Curtis

Did you know that you can earn money through bonds as well as debentures? But of course, you have to understand first what debentures are and how they work. You also have to check your risk appetite so that you know if you can handle the risk profile of a debenture. The first rule in investing is never to lose money.

A majority of people, who want to get some kind of benefit from fixed interest investments, usually invest in some kind of unsecured note, bond, debenture, or fixed term deposit. The idea behind investing in these is that one should be able to get a higher return over a long period of time as compared to a short term investment. The interest paid on these forms of fixed interest investments is quite sufficient even though there is no such capital growth.

Debentures are a financial tool used by companies to finance their investments. They borrow money from investors through debentures and in return they promise a fixed rate of interest to be paid regularly depending on the terms of agreement. In corporate finance, debentures fall under fixed income investments because your return is stuck at a particular interest rate.

A debenture usually has a fixed interest rate so you know how much you will be getting at each interval. Debentures are a cheap way for companies to raise finance because it is fuss-free and doesn't need complex assurance of payments like collateral and other security features.

Debenture loans usually have no collateral or asset secured to the loan terms. This is why its usually considered as an unsecured kind of bond. There is no guarantee for repayment in the form of collateral, asset, or line of income for the company that receives the loan. Because its such a high risk loan, it is usually given to companies that are unable to qualify for bank loans.

Just like any other loan, the debenture investor will receive the money they initially loaned in full when the maturity date arrives. As for the interest payments, they can be received on the date of maturity or they can be paid to the investor on a regular basis. Debentures are usually issued by finance companies and the money is then given to those people who are unable to get a regular loan for some reason.

As mentioned earlier, because of the lack of collateral, the risks are high. The returns, in turn, are higher because of that. The debenture is easily transferrable to other individuals. Investors can also negotiate their debenture rights with the company. Investors in debentures, however, are mostly passive investors. They just want regular income from the debentures.

Two types of debentures exist: Convertible and Non-Convertible. Between the two, convertible debentures have a lower return because of the convertibility feature. Convertibility means that the debenture can be changed into shares after a prescribed period. Non-Convertible debentures carry a higher return because there is no feature that will allow it to be converted into company shares which will give you higher gains.

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